WikiLeaks Document Releasehttp://wikileaks.org/wiki/CRS-97-231

February 2, 2009

Congressional Research Service

Report 97-231

Iran: U.S. Policy and OptionsKenneth Katzman, Foreign Affairs and National Defense Division

January 14, 2000

Abstract. This report analyzes developments in U.S. policy toward Iran, including existing U.S. sanctions inforce. It discusses changes in Iranian policy and in U.s. policy toward Iran since the May 1997 election of arelative moderate, Mohammad Khatemi, as Iran’s President. The report analyzes the outstanding issues thatdivide the two countries, and conditions under which Iran might respond positively to U.S. efforts to improverelations with Khatemi’s government.

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Congressional Research Service ˜̃ The Library of Congress

CRS Report for CongressReceived through the CRS Web

Order Code 97-231 F

Iran: U.S. Policy and Options

Updated January 14, 2000

Kenneth KatzmanSpecialist in Middle Eastern Affairs

Foreign Affairs, Defense, and Trade Division

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ABSTRACT

This CRS analyzes developments in U.S. policy toward Iran, including existing U.S. sanctionsin force against that country. The report discusses changes in Iranian policy and in U.S.policy toward Iran since the May 1997 election of a relative moderate, Mohammad Khatemi,as Iran's President. The report analyzes the outstanding issues that divide the two countries,and conditions under which Iran might agree to U.S. overtures to improve relations with Iran’sgovernment. The report will be updated to reflect major developments in U.S.-Iran relationsor in response to legislative developments. See also, CRS Issue Brief IB93033. Iran: CurrentDevelopments and U.S. Policy.

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Iran: U.S. Policy and Options

Summary

Iran and the United States have been adversaries, and have sometimes engagedin low-level military hostilities, since Iran’s Islamic revolution on February 11, 1979.During its first term, the Clinton Administration sought to build on earlier policiesdesigned to contain Iran and moderate its behavior. The Clinton Administrationinitially placed its policy of containing Iran within a broader framework for keepingboth Iran and Iraq weak, terming the policy “dual containment.” The Administrationmaintained that dual containment was a necessary departure from past Persian Gulfpolicies in which the United States has alternately tilted toward either Iran or Iraq tomaintain stability in the Persian Gulf.

In the absence of U.N. sanctions on Iran, as exist on Iraq, in 1995 and 1996, theClinton Administration and Congress undertook a number of new measures tocontain Iran. Foremost among these steps were expanded U.S. economic sanctions,including a ban on U.S. trade and investment in Iran and sanctions on foreign firmsthat make substantial investments in Iran’s energy sector. U.S. military assets, inaddition to those needed to deter Iraq, were sent to the Gulf to monitor Iran’sgrowing naval capabilities and to help deter Iranian consideration of coercive maritimeadventures. Similarly, U.S. arms sales and advice to the Persian Gulf states weredesigned to help the Gulf states defend themselves against potential attacks by Iranas well as by Iraq.

In late 1996, a debate began to develop over Clinton Administration policytoward Iran. Several prominent foreign policy experts maintained that the UnitedStates and Iran have some interests in common, such as containing Iraq and endingthe continuing conflict in Afghanistan. Others noted that differences over how to dealwith Iran had become a serious irritant in U.S.-European relations. This debateaccelerated following the upset victory by a relative moderate in Iran’s May 23, 1997presidential election. By early 1998, following the unexpected election of a relativemoderate as Iran’s president, a consensus emerged within the Administration to tryto engage Iran in a political dialogue or in mutual confidence-building measures thatcould eventually lead to normal relations. Administration officials maintain thatdiscussions with Iran could yield progress in key areas of U.S. concern, whichinclude: Iran’s attempts to acquire weapons of mass destruction, its support forinternational terrorism, and its backing for groups opposed to the Arab-Israeli peaceprocess.

The Administration’s apparent policy shift has created concern among somegroups and Members of Congress that the Administration will make substantiveconcessions to Iran in advance of clear changes in Iran’s international behavior.Although some Members now appear to accept the concept of U.S. dialogue withIran, some Members are concerned that Iran would try to take advantage of anyeasing of U.S. containment policy to accelerate a strategic buildup and fund MiddleEastern terrorist groups.

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Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1U.S.-Iran Relations Under Previous Administrations . . . . . . . . . . . . . . . . . 2Instruments of Containment Inherited From Previous Administrations . . . . 4

The Clinton Administration’s“Dual Containment” Strategy . . . . . . . . . . . . . . . . 9Additional Sanctions Imposed During the 104th Congress . . . . . . . . . . . . 11

The U.S. Trade and Investment Ban . . . . . . . . . . . . . . . . . . . . . . . . . 12Imposition of Secondary Sanctions/ILSA . . . . . . . . . . . . . . . . . . . . . 12

Other Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Military Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Counterterrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

New Policy Directions During the Administration’s Second Term . . . . . . . . . . 16Implications of Mohammad Khatemi’s Election . . . . . . . . . . . . . . . . . . . . 16

Foreign and Defense Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18U.S.-Iran Relations Since Khatemi’s Election . . . . . . . . . . . . . . . . . . . . . 20

Iran’s Response to U.S. Overtures . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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1 The late Ayatollah Khomeini issued a religious proclamation in February 1989 calling forRushdie’s death for writing the novel The Satanic Verses, which Khomeini and his aidesbelieved blasphemed Islam. For further information on Iranian activities of concern to theUnited States, see U.S. Library of Congress. Congressional Research Service. Iran: CurrentDevelopments and U.S. Policy. CRS Issue Brief IB93033, updated regularly, by KennethKatzman. 15 p. 2 Khamene’i was chosen to succeed the leader of the Islamic revolution, Ayatollah RuhollahKhomeini, upon the latter’s death on June 3, 1989. However, most experts believe thatKhamene’i lacks the undisputed authority and religious credentials of his predecessor.Nonetheless, his position gives Khamene’i overall command of the armed forces and securityservices, and the ability to make key judicial, legislative oversight, and other appointments.

Iran: U.S. Policy and Options

Introduction

The United States and Iran were allies when the Shah ruled Iran prior to the1979 Islamic revolution, but there has been animosity between the two countries sinceIranian radicals took over the U.S. Embassy in Tehran on November 4, 1979 and held52 Americans there hostage for 444 days. Clinton Administration officials havearticulated several areas in which Iran continues to challenge U.S. interests: (1) Iran’sefforts to acquire nuclear weapons and other weapons of mass destruction; (2) itspromotion of terrorism worldwide; and (3) its attempts to undermine the Arab-Israelipeace process, primarily by supporting groups that use violence to try to derail thatprocess. In public statements prior to mid-1997, some U.S. officials mentionedadditional U.S. concerns, including: efforts to subvert the Persian Gulf monarchies;a buildup of conventional weapons that threaten international shipping in the Gulf; human rights abuses; and its continuation of a death sentence against British authorSalman Rushdie.1 Several outside experts maintain that Mohammad Khatemi, aftermore than two years as Iran’s President, has been unable to fulfill his apparentintention to improve relations with the United States because he has been preventedfrom doing so by hardliners led by Iran’s Supreme Leader, Ali Khamene’i.2

Even before the election of Khatemi, some experts believed the Administrationwas overstating the potential threat from Iran. These experts saw Iran weighteddown by factional infighting and by outstanding debts to Western creditors thatslowed its military modernization programs. They maintain Iran has acted tomaintain stability on its borders by mediating such conflicts as the 1992-97 civil warin Tajikistan and the dispute between Armenia and Azerbaijan over the Nagorno-Karabakh region. Many analysts believe Iran is unlikely to take any actions thatwould threaten the free flow of oil on which Iran’s economy depends, or scare awaythe foreign investment that Iran has tried to encourage in its energy sector. Somenote that several International Atomic Energy Agency (IAEA) visits to Iran since

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3 These assessments were based on IAEA visits, not full fledged inspections. Inspectionsgenerally involve the systematic taking of samples and the performance of tests to account forthe host country’s nuclear material. Reports about the IAEA visits to Iran suggest that onlysome of the standard IAEA procedures were performed, and only at some of the sites visited.

February 1992 have not turned up any evidence of a nuclear weapons program,3 andthat Iran was an original signer of the Chemical Weapons Convention (CWC) in 1993.

U.S.-Iran Relations Under Previous Administrations

The close U.S. relationship with the Shah of Iran colored U.S. relations with thecurrent regime. The United States assumed responsibility for defending Westerninterests, including the free flow of oil, in 1971, after Britain militarily withdrew fromthe Gulf. During 1971 - 1979, within the environment of a U.S.-Soviet Cold War,the United States sought to strengthen Iran, then led by the Shah, as a “policeman”ofthe Gulf. The effort to strengthen the Shah was partly a response to the 1968 coupin Iraq which brought the left-wing Ba’th (Arabic for renaissance) Party, in whichSaddam Husayn was a senior leader, to power. The Ba’thist regime had turned to theSoviet Union for arms and political support, signing a treaty of friendship with theSoviets in April 1972. The Shah also maintained relatively good relations with Israel,which looked to forge alliances with non-Arab states in the region in order to keepits Arab neighbors contained.

The United States opted to preserve stability in the Gulf when it accepted acomprehensive understanding – the Algiers Accords – between Iran and Iraq in 1975.In those accords, both states agreed to share control of the Shatt al-Arab waterwayand to refrain from interfering in each others’ affairs. However, the accords alsorequired the United States to cutoff its support for the Kurds battling Baghdad forautonomy in northern Iraq.

Four years of relative stability in the Gulf were upset in February 1979, when theShah was overthrown by the Iranian Islamic revolution, led by Ayatollah RuhollahKhomeini. The fall of the Shah was viewed as a policy disaster by the United States,replacing a pillar of U.S. influence with an avowedly anti-Western clerical regime. The new regime came to power denouncing the United States as the “Great Satan.”The policy loss was confirmed on November 4, 1979, when radical “student”followers of Khomeini seized the U.S. Embassy in Tehran and held U.S. diplomatshostage. The setback was compounded in December 1979 by the Soviet invasion ofAfghanistan, which prompted President Carter to articulate the “Carter Doctrine” –a U.S. threat to intervene militarily if the Soviet Union encroached on U.S. vitalinterests in the Persian Gulf. On April 7, 1980, after failing to make headway towardachieving the release of the hostages, the United States formally broke diplomaticrelations with Iran. The U.S. Embassy remains occupied by Iran’s RevolutionaryGuard Corps and Iran has not compensated the United States for the seizure of theEmbassy. The possibility of freedom for the hostages receded further that monthfollowing the failed April 25, 1980 U.S. attempt to militarily rescue the hostages.Eight U.S. servicemen were killed when some of the operation’s helicopters collidedupon departing the rendevous point in Iran, following abortion of the mission.

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4 Analysts give several explanations for Iraq’s decision to invade Iran. (1) Iraq wanted to gaincomplete control of the Shatt al-Arab waterway between the two nations; (2) Iraq sought toassume the “policeman of the Gulf” role played by the Shah until his downfall; and (3) Iranwas weak and disorganized after its Islamic revolution and the Iraqi leadership felt its invasioncould trigger an overturning of the Islamic revolution. Iraq hoped thereby to blunt therevolution’s effects on Iraq’s own Shiite population, much of which looks to Iran forinspiration. Iraq cited Iranian incitement efforts and border provocations as a justification forits military moves, although, in December 1991, a report by the U.N. Secretary-Generalformally determined that Iraq started the Iran-Iraq war.5 For further information on the Iran-Contra Affair and its implications, see CRS Report 92-870 F. Iran-Contra Affair: Questions and Answers. November 25, 1992. 24 p. 6 U.N. investigators found that Iran had also used chemical weapons during the war. See:Report of the Mission Dispatched by the Secretary-General to Investigate Allegations of theUse of Chemical Weapons in the Conflict Between the Islamic Republic of Iran and Iraq.S/19823, April 25, 1988.

Some past Administrations have tried to improve relations with the Islamicregime, even though U.S. differences with Iran’s radical Islamic ideology haveremained. Although still unable to resolve the Iran hostage crisis, President Carterdeclared U.S. neutrality in the Iran-Iraq war, which began on September 22, 1980when Iraq crossed the border with Iran in force.4 The hostages were releasedminutes after President Reagan’s inauguration in January 1981. In order to preventan Iranian victory in the Iran-Iraq war, in 1982 the Reagan Administration began a“tilt” toward Iraq. The Reagan Administration opened export credits to Iraq in 1982when it removed that Arab state from the list of state sponsors of terrorism; formalU.S.-Iraqi relations were resumed in 1984. The United States also undertookdiplomatic efforts (“Operation Staunch”) to persuade individual governments not tosell arms to Iran in the ongoing war, and the United States tacitly supported thearming of Iraq by other suppliers.

Despite this tilt, in 1985-86, the Reagan Administration sought to engage Iranian“moderates” in an effort to obtain the release of Americans held hostage by pro-Iranian groups in Lebanon and to promote a strategic opening to Iran. That initiativeincluded 1985-86 U.S. arms shipments to Iran (TOW anti-tank weapons and HAWKanti-aircraft missiles) and hostage exchanges that developed into the Iran-ContraAffair.5 After the abortive dealings, the United States and Iran skirmished in thePersian Gulf several times during 1987-88 in the course of a U.S. effort (OperationEarnest Will) to protect Kuwaiti oil shipments from Iranian attack. At the same time,Iraq began to gain the upper hand in the war, launching a series of ground offensivesin 1988 that drove Iranian forces off Iraqi territory. Iraq’s ability to modify Scudmissiles and fire them at Tehran demoralized the Iranian population and undercutsupport for the war effort, as did Iraq’s use of chemical weapons in the war.6 TheJuly 3, 1988 mistaken U.S. shootdown of an Iranian civilian aircraft (Flight 655),which Iran viewed as deliberate, apparently convinced Iran that the United States wascommitted to helping Iraq win the war. Two weeks after the shootdown, Iranaccepted a U.N. cease-fire plan (Resolution 598, adopted the year earlier), andhostilities ended on August 20, 1988.

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7 Some U.S. statements set a requirement that Iranian representatives be “authoritative” ratherthan merely “authorized.” This condition was set to avoid the situation that characterized theIran-Contra Affair, in which the United States initially dealt with intermediaries claiming tospeak for the Iranian government.

Although U.S.-Iran relations appeared to reach a new low point, U.S. conditionsfor future talks with Iran were established before the Reagan Administration ended.Under the policy formulation, which has held since, the United States welcomes anofficial dialogue with Iran as long as the talks involve no preconditions, can be openlyacknowledged, and are conducted with an “authorized” representative of the Iraniangovernment.7

President George Bush, in his January 1989 inaugural address, seemed to reachout to Iran. Referring to Iran, he said that “goodwill begets goodwill” — that Iranianhelp in gaining release of American hostages in Lebanon might earn some U.S.reciprocation. The June 3, 1989 death of the leader of the revolution, AyatollahRuhollah Khomeini, also created some international optimism that Iran’s policiesmight moderate under Khomeini’s successor, Ali Khamene’i, and Ali Akbar Hashemi-Rafsanjani, who was elected President in August 1989. Iran remained neutral duringthe 1990-91 Gulf crisis, although Iran, despite its long war with Iraq, criticized alliedbombing of Iraq as unjustified aggression that was killing Muslim civilians. U.S.hostages in Lebanon were all released by the end of 1991, and the BushAdministration publicly thanked Iran for its intercession with the hostage holders –the Hizballah militia in Lebanon – in gaining their release. The stage seemed set fora U.S.-Iran thaw, but there was no overall improvement in U.S.-Iran relations. TheBush Administration might have feared that trying to improve relations would openthe Administration to accusations that it was recapitulating the “search for Iranianmoderates” that the Reagan Administration was criticized for in Iran-Contra. For itspart, Iran remained steadfastly opposed to improved relations with the United Statesbecause of the U.S. support for the Shah, the U.S. tilt toward Iraq during the Iran-Iraq war, and the U.S. involvement in the 1953 ouster of nationalist Prime MinisterMohammad Mossadeq. Iran also accused the United States of backing groupsseeking to overthrow the Islamic regime, although the United States refused contactwith a key opposition group, the People’s Mojahedin, which had killed five Americansserving in Iran during the Shah’s reign.

Instruments of Containment Inherited From PreviousAdministrations

Despite occasional dealings with or outreach toward Iran, previousAdministrations established a broad package of economic sanctions, which served asa basis from which to implement containment of Iran. The purpose of the U.S.sanctions was to deprive Iran of the technology it needs to build up its strategiccapabilities, as well as to signal — to Iran and to other countries — U.S. oppositionto Iran’s policies.

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8 These sanctions included the halting of U.S. military spare parts shipments to Iran(November 8); a ban on imports of Iranian crude oil and unfinished oil or finished productsmade from Iranian crude oil (November 12); a declaration of a state of emergency againstIran, the blocking of all Iranian government property in the United States, and the freezing ofIranian deposits in U.S. banks and subsidiaries of U.S. banks (November 14). On April 7,1980, the President imposed a ban on all U.S. exports, credits, performance of contracts, andmost types of payments to Iran. On April 17, 1980, he banned all financial transactions withIran, imposed an embargo on imports of Iranian goods, restricted the use of U.S. passportsfor travel to Iran, restricted travel by U.S. citizens and permanent residents to Iran, andrevoked certain licenses for transactions with Iran Air, the National Iranian Oil Company, andthe National Iranian Gas Company. The text of the executive orders cited in these sanctionsare contained in U.S. Congress. House and Senate. Committee on Foreign Affairs andCommittee on Foreign Relations. Legislation on Foreign Relations Through 1992. JointCommittee Print. Washington, G.P.O., June 1993. Pp. 1059 - 1087.9 Opall, Barbara. U.S. May Owe Iran Billions in Penalties. Defense News, February 22-26,1998.

A wide range of economic sanctions on Iran were imposed just after theNovember 4, 1979 seizure of the American hostages in Tehran.8 The January 19,1981 Algiers Accords that ended the hostage crisis required the United States to liftall previous sanctions. President Carter implemented that commitment in a series ofexecutive orders in January 1981, but he did not restore diplomatic relations.

The resolution of the hostage crisis did not resolve all outstanding financialissues between the two countries. The Algiers Accords set up a process to arbitratefinancial claims from the rupture in relations, called the U.S.-Iran Claims Tribunal,which meets at the Hague. At the tribunal, which convened for the first time on July1, 1981, a panel of three Americans, three Iranians, and three neutral arbiters decidethe conflicting governmental, individual, and corporate claims.

! Since the Tribunal began work, about 4,000 cases have beenresolved, the overwhelming majority of which were in favor of U.S.claimants. The largest claims unresolved are by Iran for U.S. non-performance on about 1,200 Foreign Military Sales (FMS) cases. In addition to military services, these cases include militaryequipment — including Spruance-class destroyers, I-Hawk airdefense batteries, CH-47 helicopters, F-16 aircraft, and Tong-classsubmarines — that Iran paid for but were not delivered because ofIran’s revolution. One press report says that the United States, iffound liable for these claims, might have to pay Iran $10 billion plusinterest since 1979.9 Some of the military items were resold to otherbuyers or were incorporated into the U.S. arsenal. One military casewas settled in November 1991 when the United States paid Iran $278million for Iranian-owned military equipment undergoing repair ortesting in the United States at the time of the revolution, and notreturned to Iran. In August 1992, Iran settled the last two (AtlanticRichfield and Sun Co.) of ten cases of U.S. oil companies whoseproperties in Iran were seized after the revolution. Each firm waspaid $130 million. In December 1999, the United States paid Iran

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10 For a further discussion of U.S. sanctions in place prior to the Clinton Administration, seethe sections on Iran in U.S. Library of Congress. Congressional Research Service. EconomicSanctions Imposed by the United States Against Specific Countries: 1979 Through 1992.CRS Report 92-631 F, by Erin Day. Revised August 10, 1992. 654 p.11 U.S. aid to and credits for terrorism list states are prohibited by Section 620 of the ForeignAssistance Act of 1961 (FAA), as amended (22 U.S.C. 2371). 12 Section 40 of the Arms Export Control Act, as amended (22 U.S.C. 2780). Prior to 1986,Administration policies prohibited U.S. arms sales to the Islamic Republic.

about $6 million to settle a judgement in favor or Iran against theU.S. defense contractor Avco Corp.

! Iran also claims that it should receive the balances of letters of creditissued by U.S. banks to guarantee the performance of U.S.contractors and suppliers of the Iranian government prior to therevolution. Such performance guarantees were generally issued asso-called standby letters of credit. The U.S. position is that Iran isnot entitled to any such monies unless the Claims Tribunal issues ajudgement in favor of Iran in a particular case against a U.S.contractor or supplier. U.S. officials say the potential value of thedisputed letters of credit is very small compared to the issue ofundelivered military equipment.

! The United States government maintained control over about $22million worth of Iranian diplomatic property in the United States,including the former Iranian Embassy in Washington D.C., andassociated operating accounts. The United States asserts that theproperty was confiscated in reciprocity for Iran’s seizure of the U.S.Embassy in Tehran, for which Iran did not compensate the UnitedStates. The United States has insisted this issue remain outside thescope of authority of the U.S.-Iran Claims Tribunal.

!! Iranian officials assert that Iran is entitled to the assets in the UnitedStates of relatives of the former Shah of Iran. Pursuant to section535.217 of the Iranian Assets Control Regulations (31 CFR Sec.535.217), the assets of the Shah’s relatives in the United States areblocked as long as they are the subject of Iranian legal attempts togain control of the assets.

Iranian actions against the United States since the hostage crisis promptedsucceeding Administrations and Congresses to reimpose or add sanctions against Iran,to the point where Iran currently is subject to some of the strictest U.S. sanctions ofany country in the world.10 On January 19, 1984, based largely on evidence of Iran’sinvolvement in the October 1983 bombing of the U.S. Marine barracks in Lebanon,then Secretary of State George Shultz designated Iran a state sponsor of terrorism(the “terrorism list”). That designation prohibits Iran from receiving U.S. foreignassistance and credits,11 triggered (in 1986) a ban on U.S. sales of items on theMunitions Control List,12 imposes strict requirements for the licensing of U.S. exports

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13 Section 6(j) of the Export Administration Act of 1979, as amended (50 U.S.C. app.2405(j)). The Export Administration Act provides for a presumption of denial of licenses toexport commercial dual use items to military end users. Exports to non-military end users,or for clearly civilian exports to military end users, were to be evaluated on a case-by-casebasis. 14 Section 6 of the Bretton Woods Agreements Act Amendments of 1978, as amended 22U.S.C. 286e-11, applies specifically to the International Monetary Fund. Section 327 of theAnti-terrorism and Effective Death Penalty Act of 1996 (P.L. 104-132) amended the ForeignAssistance Act to make permanent the requirement that the United States oppose allinternational lending to Iran. This provision had been included in yearly foreign assistanceappropriations.

of dual use items to Iran,13 and requires that U.S. Executive Directors of internationalfinancial institutions vote against International Monetary Fund (IMF) loans to Iran.14

Several legislative and executive actions thereafter reinforced these restrictions.

! Since FY1985, the foreign assistance appropriations have containeda provision withholding the proportionate share of U.S. contributionsto programs by international organizations for Iran (among othercountries). No waiver is provided for. The restriction primarilyaffects U.N. humanitarian aid programs, such as the World FoodProgram. Aid organizations that receive U.S. funds can operateprograms in Iran but, if they do so, U.S. contributions to the assistingagency are reduced by the amount of the U.S. share of that program. Following legislative history and congressional intent, the provisionis not applied to disaster relief assistance. (In early 1997, the UnitedStates gave Iran $125,000 in relief aid for two earthquakes that year.The funds were distributed through the International Federation ofthe Red Cross and Red Crescent Societies). The InternationalSecurity and Development and Cooperation Act of 1985 (P.L. 99-83) amended the Foreign Assistance Act (Section 307) toincorporate this provision. Under that law, the restrictions do notapply to UNICEF or International Atomic Energy Agency programs.

! On February 28, 1987, Iran was first designated as a country that hadfailed to curb — or help the United States curb — drug traffickingthrough its territory. This designation, renewed for Iran every yearuntil 1998, imposed “drug list” sanctions, including aid cuts and therequirement that the United States vote against multilateral loans toIran. On December 7, 1998, based on U.S. assessments of areas inIran under cultivation, the Administration removed Iran from theU.S. list of major drug producing countries. The removal exemptedIran from an annual certification review, and had the effect of liftingthe “drug list” sanctions from Iran (although similar sanctions are ineffect under other laws and Executive orders).

! On October 29, 1987, in retaliation for Iranian attacks (minings,small boat assaults) on U.S.-flagged Kuwaiti tankers in the Persian

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15 Congress specifically authorized the President to ban imports from terrorist countries inSection 505 of the FY1986 foreign aid authorization (P.L. 99-83).16 An additional exemption to the ban came about in 1991 as a result of U.S.-Iran negotiationsat the Claims Tribunal. To address Iran’s difficulties in maintaining the required $500 millionin the U.S.-Iran Claims Tribunal security account, the two countries agreed that U.S. oilcompanies could import Iranian crude oil on a case-by-case basis if the proceeds weredeposited in the security account or if the imported oil was accepted as settlement in a claimstribunal decision in favor of an American claimant.

Gulf, President Reagan prohibited the import of Iranian-origin goodsinto the United States.15 However, the petroleum products that arerefined from Iranian crude oil in a third country16 are considered aproduct of that third country, and imports of the refined oil areallowed. Until the May 1995 trade ban (see below), American oilcompanies were also allowed to continue buying Iranian oil andselling it outside the United States.

! Since FY1988, Congress, in successive foreign aid appropriations,

has prohibited the use of any U.S. foreign assistance funds to financedirectly (direct aid) any assistance or reparation to Iran (among othernamed countries). Since FY1990, the legislation has included aprohibition on Export-Import Bank credits, guarantees, andinsurance. No waiver is provided for.

! Since FY1989, Iran (among other countries) has been named in aseparate provision of the foreign assistance appropriations that barsindirect U.S. aid. (U.S. contributions to multilateral developmentbanks or international organizations that loan to or work in Iran.)However, Presidents Bush and Clinton have routinely waived thisprovision every year on the grounds that withholding U.S.contributions to multilateral development banks and internationalorganizations — even if they benefit Iran or other U.S. adversaries— would be contrary to the national interest.

! In October 1992, Title XVI of the FY1993 National DefenseAuthorization Act (P.L. 102-484), entitled the Iran-Iraq Arms Non-Proliferation Act, required denial of all U.S. applications to exportdual use items to Iran (and Iraq), and imposed penalties on violators.It also provided for mandatory sanctions against foreign persons(U.S. Government procurement and U.S. export sanctions) andmandatory (same as above) and discretionary sanctions againstcountries (suspension of U.S. aid, military sales, codevelopment andcoproduction agreements and military and dual use technicalexchanges, and U.S. votes against international loans) that transfer“destabilizing” advanced conventional arms to Iran. Section 1408 ofthe FY1996 defense authorization act (P.L. 104-106, February 10,1996) amended this law to apply to the transfer to Iran (or Iraq) oftechnology that can be used in weapons of mass destructionprograms.

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17 The rationale for the dual containment policy is discussed in Anthony Lake. ConfrontingBacklash States. Foreign Affairs, Volume 73, No. 2, March/April 1994. Pp. 45-55; andSymposium on Dual Containment: U.S. Policy Toward Iran and Iraq, in Middle East Policy,Volume III, No. 1, 1994. Pp. 1-26. 18 Text of Martin Indyk’s speech can be found in the proceedings of the Soref Symposium,Challenges to U.S. Interests in the Middle East: Obstacles and Opportunities, May 18-19,1993. Washington, Washington Institute for Near East Policy. Pp. 1 - 8. 19 The United States is obliged by Point 1 of the January 19, 1981 Algiers Accords that settledthe hostage crisis “not to intervene, directly or indirectly, politically or militarily, in Iran’sinternal affairs.” See text of the Algiers Accords, formally titled the “Declaration of theGovernment of the Democratic and Popular Republic of Algeria,” in State DepartmentBulletin, February 1981. Pp. 1-5. 20 See, for example, Gause, Gregory. The Illogic of Dual Containment, in Foreign Affairs.Volume 73, No.2, March/April 1994. 21 Analysis of U.N. sanctions and Iraq’s compliance can be found in CRS Issue BriefIB92117, Iraqi Compliance With Ceasefire Agreements, by Kenneth Katzman.

The Clinton Administration’s“Dual Containment” Strategy

Upon taking office, the Clinton Administration stressed that it would containIran within a broader policy framework that casts both Iran and Iraq as “rogueregimes” and seeks to keep both weak.17 On May 19, 1993, at a speech inWashington, former National Security Council Senior Director for the Near EastMartin Indyk first described the Administration’s policy as one of “dual containment”of Iran and Iraq.18 The Clinton Administration presented dual containment as adeparture from previous U.S. Gulf policies that have relied on Iran or Iraq to restoreor maintain stability in the Gulf. The past policies, according to the Administration,had contributed to the downfall of the Shah and the Iraqi invasion of Kuwait.

There was speculation among observers that the policy was intended to resultin the overthrow of regimes in Iran and/or Iraq, but, if this was the intention, theAdministration did not state it explicitly.19 In response to initial doubts among manyobservers that both countries could be contained simultaneously,20 Administrationofficials maintained that the new policy did not ignore balance of powerconsiderations, but, rather, sought to maintain that balance at a low level of Iranianand Iraqi capability. Administration officials added that dual containment did notmean “duplicate containment” — that U.S. policy toward Iran would be exactly thesame as it was toward Iraq. Iraq is contained by international implementation of verystrict U.N. sanctions21 resulting from the August 2, 1990 invasion and occupation ofKuwait, but Iran is not subject to any U.N. or international sanctions. Therefore, tocontain Iran, the United States has acted unilaterally and bilaterally.

The Iran policy of the first two years of the Clinton Administration relied largelyon stepped up attempts to elicit cooperation from U.S. allies and other countries inisolating Iran. The Administration’s objectives were to persuade U.S. allies not toexport arms or dual use items to Iran, not to reschedule any credits they have issued

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22 U.S. Congress. House. Committee on Foreign Affairs. Subcommittee on Europe and theMiddle East. Developments in the Middle East: July 1993. Hearing, 103rd Congress, 1st

Session. Washington, G.P.O., July 27, 1993. P. 8.23 The FY1994 Foreign Assistance Appropriations (P.L. 103-87) stated that U.S. officialsmust vote to oppose multilateral lending to Iran. Title I of that law cut U.S. funding to theWorld Bank by the amount the Bank had agreed in 1993 to lend Iran ($463 million) and addeda new provision that the U.S. share of a portion of the Bank’s capital increase would bewithheld if the Bank made any further loans to Iran. Similar provisions were repeated inforeign assistance appropriations for FY1995 (P.L. 103-326) and FY1996 (P.L. 104-107),but did not appear in the FY1997 appropriation (P.L. 104-208).

to Iran or to issue any new credits, and not to support loans to Iran by internationalor multilateral banks. The Administration said it did not seek to persuade its allies orother countries to cut off political dialogue or routine trade with Iran, but only torefuse to conduct normal relations with Iran unless or until Iran modified itsunacceptable behavior.22

Differences in approaches to Iran between the United States and its allies proveddifficult to bridge. The allies of the United States in Europe and Japan maintainedthat trade and contact with Iran, rather than isolation, would succeed in moderatingIran’s international behavior by helping promote moderate elements in Iran who wantgreater international contact. In December 1992, the European Union (EU)countries formally adopted a policy termed “critical dialogue,” consisting of politicaland economic engagement with Iran coupled with criticism of Iran’s objectionablebehavior. Some European governments maintained that the United States wasexcessively critical of the Islamic regime in Iran because of the fall of the Shah, a keyU.S. ally, and the 1979-1981 hostage crisis. On the other hand, some observers heldthat U.S. allies may have overemphasized the political benefits of engagement tocover a pragmatic calculation of the economic necessity of dealing with Iran and its65 million people. Most of Iran’s external debt — about $30 billion at its height in1993 — was held by creditors in European countries and Japan, and these countrieswanted to ensure that Iran was able to service this debt. (As of September 1999, anddespite a sharp temporary drop in oil prices during 1999, Iran had reduced itsexternal debt to about $11.7 billion, not including an additional $10 billion in futureinterest payments and outstanding commercial debt.)

Over U.S. opposing votes and diplomatic objections, U.S. allies voted with othercountries in early 1993 to authorize $463 million in World Bank loans to Iran forpower, irrigation, and health projects. Also over U.S. bilateral protests, the alliesrescheduled about $14 billion in Iranian debt during 1994-5, reaching bilateralagreements with Iran rather than adhering to Paris Club rules that specify multilateralrescheduling with International Monetary Fund (IMF) involvement. Administrationand congressional pressure succeeded in persuading the World Bank to suspend newloans to Iran in 1994.23 Bilateral U.S. pressure, although with no threat of sanctions,led Japan to withhold the remaining $1 billion of a total $1.4 billion official loanprogram for Iran to construct a hydroelectric dam over the Karun River. Thisprogram, which was partially resurrected in 1999, has been the only bilateralassistance program for Iran; no European countries have given development aid toIran.

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The United States did not win agreement from all its allies to curtail dual useexports to Iran, although the allies did agree to end such sales to known military end-users. During its first term, the Clinton Administration, along with Congress,achieved limited success in changing the policies of Iran’s major arms and technologysuppliers, Russia, China, and North Korea. The Administration’s need to manage anumber of complex issues in U.S. relations with these countries complicated U.S.efforts to end their dealings with Iran. On several occasions during the ClintonAdministration, as noted below, Members of Congress issued statements and enactedlegislation urging or requiring Administration steps to pressure Iran’s suppliers tocancel deals with Iran. (For further information, see CRS Report 97-474 F, Iran:Arms and Technology Acquisitions.)

Additional Sanctions Imposed During the 104th Congress

A turning point in policy toward Iran occurred during the latter stages of the firstterm of the Clinton Administration. In November 1994, apparently frustrated by U.S.allies’ refusal to isolate Iran and the continuation of Iran’s objectionable behavior, theAdministration began an internal Iran policy review. On January 8, 1995, Iran andRussia finalized a major nuclear reactor deal that was perceived as providing Iran withthe expertise and some of the technology to advance a nuclear weapons program. On January 22, 1995, a bombing in Israel by an ally of Iran, Palestinian Islamic Jihad(PIJ), killed 21 and wounded 60. Also in January 1995, the 104th Congress wasinaugurated and strong proponents of additional actions against Iran assumed keypositions. Senator D’Amato, who became Chairman of the Senate BankingCommittee, proposed legislation to impose a total ban on trade with Iran (S.277,introduced January 25, 1995). On February 8, 1995, Speaker of the House NewtGingrich recommended that the United States take active measures to overthrow theIranian regime as “the only policy that makes sense.”

The Administration’s policy review, which was completed by April 1995,reportedly found that continued U.S. trade with Iran — particularly the trading ofIranian oil overseas by U.S. companies and their foreign subsidiaries — was creatinga perception internationally that the United States was not serious about isolatingIran. In 1992, for example, the United States and Iran conducted $748 million inbilateral trade, placing the United States among Iran’s top five trading partners forthat year. During 1994, U.S. oil companies purchased about one-quarter of Iran’stotal oil exports for resale outside the United States.

In the course of the policy review, the Administration decided that additionalsteps should be taken to weaken and isolate Iran. The first opportunity came in earlyMarch 1995, when the U.S. oil company Conoco, Inc., announced a deal with Iranto develop oilfields off Iran’s Sirri Island in the Persian Gulf. President Clinton’sExecutive Order 12957 of March 15, 1995, barred U.S. firms and their subsidiariesfrom investing in or managing the development of Iran’s energy resources. Conoco,although its contract was signed prior to the Executive order and was not required towithdraw from the deal, voluntarily canceled the contract. A French firm, Total SA,in partnership with Petronas of Malaysia, subsequently replaced Conoco as thedeveloper of the Sirri fields. (In early October 1998, the field became operational at7,000 barrels per day of production, and is expected to produce a maximum of100,000 barrels per day.)

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24 For further analysis of the trade ban and its effects, see CRS Report 95-909 F, Iran: U.S.Trade Ban and Legislation. Updated January 4, 1996, by Kenneth Katzman. 25 These projects were offered to foreign investors as “buy-back” arrangements, in which theinvesting firm is repaid with a percentage of the proceeds when the project becomesoperational.

The U.S. Trade and Investment Ban. On April 30, 1995, President Clintonannounced in a speech to the World Jewish Congress that he would ban U.S. tradewith and investment in Iran. The ban, contained in Executive Order 12959 of May6, 1995, also prohibited re-exportation to Iran of U.S. goods as well as any financing,loans, or related services for trade with Iran.24 The Executive order prevented U.S.firms from even negotiating with Iran any investments or trade relations that wouldbe implemented if and when the ban is rescinded. However, the Executive orderprovided for the case-by-case licensing of crude oil swap arrangements with Iran inthe Caspian Sea and Central Asia, and did not prohibit the importation to the UnitedStates of Iranian oil that is refined outside Iran. (Refined oil is considered a productof the country in which it is refined.) The ban also left a loophole for U.S. productsto be incorporated into goods manufactured in a third country, and containing morethan 10% U.S. content, to be exported to Iran. (This loophole was closed byExecutive order 13069 of August 19, 1997.)

The trade ban did not immediately shift international attitudes toward Iran. OnlyEl Salvador, Israel, Ivory Coast, and Uzbekistan expressed outright support for themeasure. Japan and U.S. allies in Europe said they would not work to undermine it,but they refused to give up their commercial ties to Iran. In October 1995, fourmonths after the ban took effect, Administration officials testified before Congressthat Iran had, for the most part, found new buyers for the oil previously purchased byU.S. firms. China and other Asian countries increased their purchases of Iranian oil,although some were motivated as much by economic growth demands as by the desireto become closer to Iran politically. The relative lack of international support for theU.S. trade ban appeared to convince the Administration and many in Congress thatfurther steps were needed if Iran were to be isolated and kept strategically weak.

Imposition of Secondary Sanctions/ILSA. Prior to the imposition of the U.S.trade ban, Senator D’Amato and others in Congress had proposed ways to try tocompel U.S. allies to adopt U.S. policies toward Iran. In March 1995, SenatorD’Amato introduced a bill (S.630) to impose U.S. sanctions on foreign firms thatengaged in business dealings with any sector of Iran’s economy. The Administrationopposed the measure on the grounds that such broad secondary sanctions wouldincur vehement European and other foreign country opposition. However, theAdministration agreed, in principle, with Senator D’Amato and others in Congresswho maintained that, in order to reduce Iran’s long term potential to fund terrorismand acquire weapons and technology, the United States should act to prevent foreigninvestment in Iran’s crucial energy sector. The sector accounts for about 80% ofIran’s foreign exchange revenues.

Shortly before Iran’s November 1995 solicitation for foreign investment ineleven major petroleum and gas development projects,25 the Administration andSenator D’Amato agreed on a mutually acceptable version of S.1228, introduced by

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26 An amendment to S.1228 applying all sanctions in the bill to Libya as well as Iran wasintroduced by Senator Kennedy and included in the Senate-passed version. 27 Music, Kimberly. Vague U.S. Guidelines on Iran, Libya Could Signal Coming PolicyChanges. The Oil Daily, December 17, 1996. P.1.28 As defined by the Administration guidelines, investment involves a contract to developIran’s petroleum resources, a share of ownership of that project, or the derivation of royalties,earnings, or profits from that development. The definition of investment does not include theentry into, performance, or financing of a contract to sell or purchase goods, services, ortechnology.

the Senator in September 1995 and passed by the Senate in December of that year.The bill sanctioned foreign investment in Iran’s (and Libya’s)26 energy sector. TheHouse passed a stricter bill, H.R. 3107, in June 1996. A version of H.R. 3107containing sanctions on investment in Iran or Libya’s energy sectors as well as energyequipment exports to Libya, was cleared by both chambers by July 1996. ThePresident signed the bill, the Iran-Libya Sanctions Act (ILSA) on August 5, 1996(P.L. 104-172). ILSA expires five years after enactment, according to one of itsprovisions.

ILSA requires the President to impose, on any foreign person (individual, firm,or government enterprise) that invests more than $40 million (the thresholdinvestment dropped to $20 million one year later, see below) in any one year, at leasttwo of the following six sanctions:

(1) denial of Export-Import Bank loans for U.S. exports to the sanctioned entity(2) denial of specific U.S. licenses for exports to the sanctioned entity (assuming the

exports needs a license to be exported)(3) denial of U.S. bank loans of over $10 million in one year to the sanctioned entity(4) disallowing a sanctioned entity, if it is a financial institution, to serve as a primary

dealer in U.S. Government bonds or as a repository of U.S. Government funds(5) prohibition on imports from the sanctioned person to the United States(6) prohibition on U.S. Government procurement from or contracting with the

sanctioned entity.

Guidelines (not formal regulations) for implementing ILSA, issued by the StateDepartment on December 16, 1996, appeared to give the President substantial latitudein determining whether or not a foreign company should be sanctioned.27 Theguidelines primarily reiterated definitions and interpretations of such terms as“investment”28 that are contained in the law itself or associated report language (H.Rept. 104-523, Part II). On January 7, 1997, the State Department issued a list ofprojects — the eleven projects put out for bid by Iran in 1995 — that would besubject to review under the law.

European and Japanese reaction to ILSA was negative. In addition to differingwith the U.S. approach as to how best to change Iran’s behavior, U.S. allies viewedILSA as an unacceptable extraterritorial application of U.S. law. ILSA provided forthe waiving of sanctions for firms of countries that join a multilateral sanctions regimeon Iran but lowered the investment threshold to $20 million for firms of countries thatdo not join such a multilateral regime within one year of enactment. In an effort to

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defuse ILSA as an irritant in U.S.-EU relations, the Administration reached anagreement with the EU on April 11, 1997 to work toward a common policy thatwould enable the Administration to waive ILSA. It appeared that U.S. and Europeanpolicies would converge following the April 10,1997 German court verdict that Iran’sleadership was responsible for a 1992 assassination of a Kurdish dissident in Berlin.However, the EU diplomatic sanctions on Iran were insufficient to achieve a StateDepartment determination that the EU countries had taken economic steps againstIran. Therefore, on August 5, 1997, the State Department said that the original Iraninvestment threshold level of $40 million in one year had dropped to $20 million.

By virtue of its place on the U.S. terrorism list, other secondary sanctions wereimposed on Iran by the Antiterrorism and Effective Death Penalty Act of 1996 (S.735,P.L. 104-132, signed April 25, 1996). Major provisions include the following:

! Section 321 imposes penalties on any U.S. person that engages infinancial transactions with a country on the terrorism list. Thissection essentially legislated the U.S. trade bans already in force, byExecutive order, for most of the terrorism list states, including Iran.The section did not provide for a presidential waiver but does allowfor implementation based on regulations by the State Department, inconsultation with the Treasury Department.

! Section 325 of that law amends the Foreign Assistance Act toauthorize the President to withhold foreign assistance to any countrythat aids countries on the U.S. terrorism list. The provision providesfor a presidential waiver on national interest grounds.

! Section 326 amends the Foreign Assistance Act to authorize thePresident to withhold U.S. assistance to any country that provideslethal military assistance to a terrorism list country. A nationalinterest waiver is provided for.

! Section 327 amends the International Financial Institutions Act (22U.S.C. 262c et seq) to require the United States to oppose anymultilateral lending to terrorism list states. No waiver was providedfor.

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29 Iran Sparks Off a Boat Race. Middle East Economic Digest, April 29, 1994. P. 15.30 U.S. To Send Mine-Clearing Ships To Gulf. Reuters, February 14, 1996. 31 Country (Saudi Arabia) to Buy Submarines to Guard Gulf, Coastlines. Agence FrancePresse, April 14, 1994. This report quotes the Saudi deputy Defense Minister as saying SaudiArabia would like to purchase its own submarines. Other Gulf states are reportedly interestedin frigates or anti-submarine warfare systems to deal with Iran’s submarine fleet.

Other Measures

Military Pressure.During its first term, theClinton Administrationpublicly highlightedconcerns about Iran’sconventional militarymodernization program.The Administration cited,in particular, Iran’sgrowing naval and anti-ship missile capabilities andthe perceived potential ofthese systems to disruptworld energy suppliestransiting the Strait ofHormuz or attack U.S. andGulf state facilities. U.S.naval officials also notedconcerns about the abilityof Iran’s three Russianmade submarines to laymines undetected or delivertorpedoes, and about Iran’sability to deliver Chinese-made anti-ship missiles from land (the C-802) and sea (the C-801K).

Although confident it could quickly defeat an Iranian attempt to block the Straitof Hormuz, the Clinton Administration took some specific military steps to deal withIran’s emerging capabilities. It maintained a carrier battle group in the Gulf nine outof twelve months of the year, as well as two U.S. submarines, not only to deter Iraqbut to demonstrate U.S. power to Iran as well. In 1994, the U.S. Navy reportedlyfitted its warships in the Gulf with torpedo decoy equipment.29 In early 1996, theU.S. Navy began to deploy minesweepers in the Gulf.30 The Administrationapparently encouraged the Gulf states to allocate an increasing portion of theirprocurement budgets to upgrade their naval capabilities, in part to counter Iran’ssubmarine acquisitions.31

Counterterrorism. During its first term, the Clinton Administrationconsistently characterized Iran as “the world’s most active and most dangerous state

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32 Giacomo, Carol. Albright Sees China Concerns, Russia Initiative. Reuters, January 20,1997.

sponsor of terrorism.” Of particular concern have been the Iranian-supported groups,such as Hizballah, Hamas, Palestinian Islamic Jihad, and the Popular Front for theLiberation of Palestine-General Command, that have tried to derail the Arab-Israelipeace process. Administration officials have tried to enlist the help of other countriesto combat Iranian supported terrorism. For further discussion of specific steps takento counter the terrorist threat from Iran, see CRS Report RL30277, Terrorism:Middle Eastern Groups and State Sponsors, 1999. August 9, 1999, by KennethKatzman.

New Policy Directions During the Administration’s Second Term

At the beginning of its second term, the Clinton Administration said it wouldcontinue to isolate Iran. In a written response to confirmation questions from theSenate Foreign Relations Committee in January 1997, the new Secretary of StateMadeleine Albright said U.S. policy toward Iran would not change and that no formalreview of Iran policy was under way or planned.32

Statements such as this might have represented an attempt to address speculationamong outside observers that the Administration was considering a change in policy.Speculation of an imminent policy change had been generated by statements andwritings by sitting and former high-ranking U.S. officials. In an October 24, 1996informal speech in Dubai, then Assistant Secretary of State for the Near East RobertPelletreau said he was “hopeful” that Iran would take up the long-standing U.S. offerof political dialogue during a second Clinton term. In a Council on Foreign Relationsstudy and a related Foreign Affairs magazine article published April 21, 1997, formerNational Security Advisers Brent Scowcroft and Zbigniew Brzezinski, and formerAssistant Secretary of State for the Near East Richard Murphy, said the United Statesshould offer some incentives to Iran in order to moderate its behavior. In addition,U.S. and other multinational corporations stepped up criticism of U.S. policy towardIran, particularly U.S. sanctions, that they said placed them at a disadvantage incompeting for business in Iran and for large Caspian Sea energy.

Implications of Mohammad Khatemi’s Election

The unexpected landslide victory (69% of the vote) by a relative moderate,Mohammad Khatemi (see box), in Iran’s May 23, 1997 presidential electionsaccelerated the debate over U.S. Iran policy. Khatemi, known for his tolerant viewson social behavior and respect for civil liberties, succeeded Ali Akbar Hashemi-Rafsanjani, who was elected president in August 1989 (and re-elected to another fouryear term in 1993) and who, under the Iranian constitution, could not serve more thantwo terms. Khatemi was widely expected to be defeated by a rival, who was backedby the dominant conservative clerical establishment, including Iran’s Supreme Leader,Ali Khamene’i. Khamene’i, who succeeded Ayatollah Ruhollah Khomeini as

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33 Like minded individuals compete as groupings in Iran’s elections. Iran’s Interior Ministryhas not licensed any formal parties, although parties, as such, are technically not banned.

paramount leader following Khomeini’s death on June 3, 1989, leans toward theconservatives on most issues. Khatemi was backed by a faction33 of technocratsloyal to Rafsanjani, by leftist intellectuals who felt shut out of the national debate bythe conservative clergy, and by women and youth who resent heavy-handedenforcement of traditional and Islamic norms of social behavior.

Rafsanjani himself did not completely depart the political scene. After leavingthe presidency, he was appointed by Khamene’i to head a major governmental council(the Expediency Council) and, in late 1999, began to reemerge as a bridge betweenKhamene’i/conservative clerics and Khatemi/reformist elements. Rafsanjani is runningfor parliament (Majlist) in the February 18, 2000 elections and is widely expected towin and be selected as Majlis Speaker – the same position he held during 1981-89.

Although he still remains very popular, Khatemi’s hardline opponents have dealthim several setbacks. The Majlis impeached his Interior Minister, Abdollah Nuri, inJune 1998, and conservative judiciary officials tried and convicted him in 1999 for“insulting Islam” as publisher of a pro-Khatemi newspaper. Other pro-Khateminewspapers have been closed down. On October 23, 1998, Khatemi’s opponentstook advantage of a conservative-controlled candidate screening process to win alarge majority of the seats in elections to the 86 member Assembly of Experts, whichformally oversees Supreme Leader Khamene’i and would choose Khamene’i’ssuccessor, should he pass from the scene. Internal security forces – who generallyanswer to Khamene’i and the conservatives – attacked pro-Khatemi studentdemonstrators in July 1999, thereby instigating several days of violent student riots.On the other hand, Khatemi allies swept local elections on February 26, 1999, anddespite efforts by the conservatives to screen out pro-Khatemi candidates, thepresident’s allies are expected to win a plurality of seats in the February 2000 Majliselections.

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34 Lancaster, John. U.S.: Iran’s Terrorism Role Grows. Washington Post, December 4,1999.

Mohammad Khatemi was born in 1943 to areligious family, and he pursued theological studiesin Qom in the 1960s. He attained the rank of Hojjatol-Eslam, one rank below Ayatollah, in the Shiitetheological hierarchy. He joined the anti-Shah, pro-Khomeini revolutionary forces at IsfahanUniversity, distributing pro-Khomeini politicaltracts and organizing religious and political debates.Khatemi subsequently was named chairman of theIslamic Center of Hamburg, Germany, before therevolution. The Hamburg center was a bastion ofIranian revolutionary activity in Europe before thefall of the Shah. He speaks German, as well as hisnative Farsi.

In 1982, he was appointed Minister of Cultureand Islamic Guidance, serving in that post until1992, when he was forced to resign by religiousconservatives who considered him too tolerant onsuch issues as the playing of live music,independent book and newspaper publications, andwomen’s dress codes. Following his resignation,President Rafsanjani appointed Khatemi as hiscultural advisor and as head of the national library.

He is married, and has two daughters and ason.

President Mohammad KhatemiForeign and Defense

Policy. Khatemi’s professedtolerance on social issues ledmany observers to believe thathe would try to move decisivelyto end Iran’s isolation. He hastried to convince the PersianGulf monarchy states that Iranposes no threat, and he hassucceeded in communicatingthat message. Saudi-Iranianrelations improved rapidly in thefirst two years of Khatemi’spresidency, culminating in aMay 1999 visit to the Kingdomby Khatemi. Relations haveimproved to the point at whichthe two countries agreed in May1999 to exchange militaryattaches, and Iran’s DefenseMinister – a key organizer of theradical Revolutionary Guards –has been invited to visit SaudiArabia later in 2000.

Iran’s position on the Arab-Israeli peace process hasundergone some positive changesince Khatemi took office. Asearly as four days after hiselection, Khatemi said that Iranwould not intervene against the process but that it reserved its right to oppose theprocess as constituted, which Iran feels is biased against the Palestinians. In keepingwith that position, Khatemi denounced the October 23, 1998 Israeli-Palestinian WyeRiver Memorandum as unlikely to bring peace. Iran also denounced the September4, 1999 Sharm el-Sheikh Memorandum between Israel and the Palestinians.Responding to Syria’s resumption of peace talks with Israel in December 1999 aftera three year break, Iran’s Foreign Ministry said it was for Syria to decide whether ornot to talk with Israel. Foreign Minister Kharrazi said in January 2000 that it wouldbe up to Hizballah how to respond to a peace between Israel, Lebanon, and Syria, ifthat were achieved. However, press reports and Administration statements continueto indicate that Iran is assisting groups opposed to the peace process.34 These groupsinclude Hamas, Palestinian Islamic Jihad, Hizbollah, and the Popular Front for theLiberation of Palestine-General Command (PFLP-GC). This continuing aid suggestscontinuing foreign policy influences by the more hardline Revolutionary Guard andintelligence services, which have established channels to and ideological support for

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the anti-peace process groups. This continued aid to terrorist groups also appearsto enjoy the backing of Supreme Leader Khamene’i, who sides with those in Iran whowant to preserve the revolutionary elements of Iran’s foreign policy.

Khatemi also has continued the efforts of his predecessor, Rafsanjani, to stressengagement and economic ties to the Central Asian states. Khatemi has inherited ahostile regime in Iran’s neighbor to the east, Afghanistan. Iran and the ruling Talibanregime in Afghanistan nearly came to hostilities in September and October 1998,although U.N. mediation calmed the tensions by late 1998. Iran has served as amediator in the internal conflict in Tajikistan, a Persian-speaking former Sovietrepublic. Iran helped broker a November 1997 ceasefire between warring factionsthat has brought some measure of peace to that strife-torn state. (For furtherinformation on Iran’s policy in these regions, see CRS Report 98-106 F,Afghanistan: Current Issues and U.S. Policy Concerns; 98-86 F, Iran: RelationsWith Key Central Asian States; and South Asia Crisis: Effects on the Middle East.)

Seeing Iran surrounded by potentially adversaries including Iraq, Afghanistan,U.S. forces in the Gulf, and the new nuclear state of Pakistan, all factions in Iranappear unified on the need to build up Iran’s strategic capabilities. As a result, Iran’sdefense planning and its reported WMD and missile programs do not appear to haveslowed since Khatemi took office. Even if Khatemi wished to scale back Iran’sstrategic military buildup, it is doubtful he could do so; Supreme Leader Khamene’iis constitutionally the Commander in Chief of the Armed Forces, and he makes orapproves all major appointments in the regular military and the Islamic RevolutionaryGuard Corps.

Iran continues to attempt to purchase conventional arms — including tanks,combat aircraft, naval craft, cruise missiles, and air defense systems — and associatedsupport from a variety of countries including Russia, China, and Eastern Europeancountries that were formerly part of the Soviet bloc. However, acquisition of newequipment continues to be constrained by Iran’s continuing external debt burden, aswell as U.S. efforts to prevent suppliers from selling new weaponry to Iran.

Since Khatemi took office, Iran’s ballistic missile programs have madesubstantial progress, aided in large measure by Russian entities and technicians. Iran’s missile programs appear intended to give it the capability of striking Turkey,Israel, and parts of Europe. Iran fears the strategic alliance between Israel andTurkey and it appears to want to be in position to deter an Israeli attack against Iran’sBushehr nuclear reactor (now under construction by Russia) or other key targets.Iran might also want to put U.S. bases in Turkey or Western Europe at risk as adeterrent against any future U.S. military action against Iran. The core of Iran’sincreasingly sophisticated missile production efforts is the Shahab (Meteor) program.The 800-950 mile range Shahab-3 and 1,250 mile range Shahab-4 apparently arebased on North Korea’s Nodong I (800 mile range) missile, for which Iran reportedlyhelped fund development, and on Soviet SS-4 technology. Iran tested the Shahab-3on July 22, 1998, although it is unclear whether or not the test was successful, and hascontinued work on longer range versions of the missile. Iran is believed to beworking on chemical or biological warheads for the Shahab. In the 105th Congress,Members tried to address Iran’s missile program by passing the Iran MissileProliferation Sanctions Act (H.R. 2709), which was vetoed on the grounds that it

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35 Eisenstadt, Michael. Living With a Nuclear Iran? Survival. Autumn 1999. 36 Wright, Robin. In Shift, U.S. Makes Quiet Overtures To Iran Following Election Upset.Los Angeles Times, July 9, 1997.

might hurt reform in Russia. Another version of the bill, the Iran Non-ProliferationAct (H.R. 1883), has been passed by the House in the 106th Congress, and is undermight get considered in the Senate. (For further information, see CRS Report 97-474 F, Iran: Arms and Technology Acquisitions, and CRS Issue Brief IB93033.Iran: Current Developments and U.S. Policy.)

The status of Iran’s nuclear program is less clear. Iran is a party to the NuclearNon-Proliferation Treaty and, since 1992, has allowed International Atomic EnergyAgency visits to declared nuclear sites in Iran. No violations of Iran’s treatyobligations have been noted and no clandestine nuclear weapons program has beenexposed. However, Russia is continuing construction of a nuclear power reactor atBushehr, which could give Iran vital nuclear weapons-related expertise. U.S.proliferation reports continue to indicate that Iran is seeking to purchase technologyand materiel that can be used for a nuclear weapon. Some experts have writtenrecently that Iran apparently is pursuing a nuclear option and that it might become thenext nuclear power in the Middle East.35

U.S.-Iran Relations Since Khatemi’s Election

Although Iran is still pursuing policies that are at odds with U.S. interests, theAdministration appears to believe that Iran’s moderation under Khatemi has beensufficient to provide an opportunity to end 20 years of mutual estrangement. Sixdays after Khatemi’s election, President Clinton called the vote a “reaffirmation of thedemocratic process [in Iran],” and he said that he has “never been pleased about theestrangements between the people of the United States and the people of Iran.” Onepress report suggested that, in the aftermath of Khatemi’s election, the United Statesbegan to send diplomatic messages to Iran via Saudi Arabia that it wanted to improverelations.36 This press article reported that the United States was responsible for thepassage of the final communique of the G-8 summit in Denver (June 22, 1997) thatindirectly praised Iran’s mediation role in Tajikistan.

U.S. hopes for an early improvement in relations with Iran increased inanticipation of Khatemi’s Cable News Network interview on January 7, 1998,advertised as a “message to the American people.” In the interview, Khatemi ruledout dialogue with the U.S. government, but he proposed that the two countriesrebuild trust through unofficial exchanges of scholars, athletes, tourists, and othercultural groups. After the interview, Administration officials expresseddisappointment that Khatemi had ruled out a government-to-government dialogue.Administration spokespersons indicated that an official dialogue is the best way forthe two countries to resolve their longstanding differences. However, recognizingthe political constraints on Khatemi, the Administration announced in February 1998that it would accept his call for unofficial cultural exchanges and look for ways tofacilitate such ties.

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This position left some U.S. officials, outside experts, and U.S. corporationsunsatisfied, maintaining that the United States needed to do still more to reach out toKhatemi. Some strategists believe that better U.S. relations with Iran can helpcontain Iraq, which has been challenging the U.N. weapons inspection regime sinceOctober 1997 (and no inspections have been conducted since December 1998). Others believed that, unless the United States were more active in reaching out toIran, Khatemi would progressively lose power to his hardline opponents who maintainthat the United States is implacably hostile to Iran’s revolution. On the other hand,some in Congress opposed a bolder outreach toward Iran on the grounds that doingso would ultimately lead to an end to U.S. efforts to contain Iran’s strategiccapabilities. Some in and outside the Administration were concerned that U.S.overtures toward Iran would be politically unpopular; many Americans associate Iranwith the 1979-81 hostage crisis, the holding of American hostages in Lebanon, andthe failed attempt to reach out to purported Iranian “moderates” during the Iran-Contra Affair.

In mid-1998, apparently frustrated at Khatemi’s inability or unwillingness tobegin an official dialogue, the Administration opted for a bolder approach to Iran. OnJune 17, 1998, in a speech to the Asia Society, Secretary of State Albright called fora temporary alternative to a political dialogue. She offered that the two countriesundertake unspecified mutual confidence building measures — a “road map” thatwould eventually lead to normalization of relations. President Clinton reiterated andreinforced the comments the following day.

The Administration has taken several other steps over the past few years tosignal its willingness to improve relations with Iran. These apparent overturesinclude the following:

! On October 8, 1997, the State Department officially designated theIranian opposition People’s Mojahedin Organization of Iran (PMOI)as a terrorist group, in accordance with the provisions of the Anti-Terrorism and Effective Death Penalty Act of 1996 (P.L. 104-132). Two years later, the Administration designated the PMOI’s umbrellagroup, the National Council of Resistance (NCR), as an alias of thePMOI, thus applying the same restrictions on the NCR as apply tothe PMOI (a ban on contributions by U.S. persons to the group, anda ban on entry into the United States by group members, and afreezing of group assets in the United States). However, the NCRcontinues to operate in the United States. Some in Congressconsider the PMOI/NCR a legitimate organization fighting theregime in Tehran, and that the U.S. terrorist designation representedan unwarranted concession to Tehran.

! Many experts interpreted a May 18, 1998 U.S. waiver of ILSA (seeabove) sanctions against Total SA and its partners in part as aconcession to Tehran, even though the official rationale focused onU.S. efforts to prevent Iran policy from dividing the United Statesand the EU. Administration statements that a deal between RoyalDutch/Shell and Iran to develop two Iranian oil fields would take “a

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long time” to evaluate was taken by many as a signal that no ILSAsanctions would be imposed on that or similar deals.

! On December 7, 1998, the Administration removed Iran from theU.S. list of major drug-producing countries. The decision exemptsIran from the annual certification process that had placed someeconomic sanctions on Iran (although these sanctions were generallyduplicated by other laws and designations). The removal from thelist was based on objective criteria of area under narcotics cultivationin Iran, but it was widely viewed as a positive signal toward Iran.

! Since Khatemi’s election, President Clinton and other senior officialshave referred to Iran as a great nation and a great civilization, andIslam as a major world religion. In April 1999, President Clintonsaid that Iran had been subject to “quite a lot of abuse from variousWestern countries,” and that it had a right to be angry. Hiscomments were viewed as an apology for reported U.S. and Britishefforts to oust nationalist Prime Minister Mohammad Mossadeq in1953, and for the strong U.S. backing for the former Shah of Iran.

! In April 1999, the Administration announced it would consider, ona case-by-case basis, commercial sales of food and medicine to Iran(and Libya and Sudan). Under regulations issued on July 27, 1999,private letters of credit can be used to finance approved sales, butU.S. exporters cannot deal directly with Iranian banks and no U.S.government credit guarantees are being provided. However,Agriculture Secretary Dan Glickman said in September 1999 thatU.S. credit guarantees for such sales (which do not meet the standarddefinition of U.S. foreign assistance, since the guarantee would bepaid to the U.S. exporter, not Iran) were under consideration.

! On October 5, 1999, the Administration confirmed press reports thatit had sent a direct message to Iran asking for cooperation into theJune 5, 1996 bombing of the Khobar Towers military housingcomplex in Saudi Arabia. Many viewed the direct message,reportedly passed via an Omani official intermediary, as an overturetoward Iran. However, in confirming the direct message, StateDepartment spokesman Jamie Rubin was also portraying continuedU.S. concerns about Iran by stating that the United States had“information, but not proof,” that Iranian government officials mighthave been involved in the bombing. If it is shown that Iranianofficials were involved in the bombing, the consequences areuncertain because the bombing preceded Khatemi’s tenure andSaudi-Iranian relations have since improved substantially.

! On November 24, 1999, the State Department confirmed that it hadrequested Iran allow periodic visits to Iran by U.S. officials tofacilitate consular work associated with expanded people-to-peoplecontacts between the two countries. Iran turned down the request.

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37 Washington Post, December 22, 1995. 38 This service was established by H.R. 2267, P.L. 105-119 (H.Rept. 105-405), theCommerce/State/Justice appropriation for FY1998.

! In December 1999, the Administration licensed the sale to Iran ofBoeing spare parts to repair potential defects in seven Iran Airpassenger aircraft. The licenses were granted under a provision ofthe 1995 trade ban that allows for licensing of parts for the safeoperation of civilian passenger aircraft. However, the Administrationdid not encourage interpretation of that license as a policy signal toIran.

Iran’s Response to U.S. Overtures. Most Iranian leaders have welcomedwhat they term a change in the “tone” of U.S. statements and actions toward Iran, butthey maintain that the United States needs to demonstrate its sincerity through deedsbefore relations can improve. Supreme Leader Khamene’i, on the other hand, hascontinued to rule out a dialogue with the United States and has called those Iranianswho favor talks with the United States naive or ignorant. Foreign Minister KamalKharrazi, in a September 28, 1998 speech to the Asia Society that was billed as aformal response to Secretary Albright’s June 1998 address on Iran, continued to ruleout a formal dialogue with the United States. However, he said that there could besome areas of cooperation with the United States, such as bringing peace toAfghanistan and combating narcotics trafficking. Iran’s leaders continue to stresstheir grievances with U.S. policy in the Middle East and toward Iran. Thesegrievances, the U.S. response, the outcome of the February 2000 Majlis elections inIran, and the outcome of the U.S. presidential election in November 2000, mightdetermine whether U.S.-Iran relations are able to improve. These issues are discussedbelow.

! First and foremost, Iran believes relations with the United States, theworld’s sole remaining superpower, will always be unequal and theUnited States will not treat Iran with respect. Despite tacit U.S.apologies for past interference in Iran’s affairs, Iranian conservativesmaintain that if relations with the United States are restored, theUnited States will revert to its past policies of attempting tomanipulate Iranian politics.

! Some Iranian leaders believe that the United States is still trying tooverthrow the Islamic regime. As evidence, they point to pressreports of $20 million in U.S. funding for covert operations againstIran in the FY1996 intelligence authorization law (P.L. 104-93).37

The relevant provisions of that law are classified. When it wasestablished in October 1998, Iran also complained about Radio FreeIran as an effort to change the regime.38 Some Iranian leadersmaintain that, although the PMOI and NCR have been designated asterrorist organizations, the NCR’s continued operations in the UnitedStates suggests that the United States has been insincere in itstreatment of the group as terrorist.

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! Iranian leaders, particularly Rafsanjani (most recently on December21, 1999), have demanded the United States release “frozen” Iranianassets as a condition of improved relations. The disposition of theseassets was discussed above. U.S. officials maintain that some of thefunds Iran claims are frozen are under discussion at the U.S.-IranClaims Tribunal at the Hague. The United States says it willcontinue to contest the Iranian claims. However, some outsideexperts believe that the United States could agree to settle the casesunder U.S. government control — such as those involvingundelivered military equipment and services — if it wanted to makea substantive concession to Iran. It is unlikely the United Stateswould unblock Iran’s diplomatic property unless or until there werean agreement with Iran to resume relations.

! Iranian leaders complain that the substance of U.S. policy has notchanged since Khatemi’s election because U.S. sanctions remain inplace. Although the ban on commercial sales of food and medicineto Iran has been eased, Iran maintains that it still cannot sell itsproducts, such as carpets and caviar, to the American people.Iranian leaders also complain that ILSA is still in place, even thoughno sanctions have been imposed on any foreign energy firm dealswith Iran. They note that the Administration has threatened tosanction, under ILSA, energy projects that would transit Iran. Iranadvertises itself as the cheapest and easiest route for Central Asianstates to bring their oil and gas to markets in Asia and Europe. TheAdministration and many in Congress, although supportive of thegeneral concept of multiple energy routes in the region, do not wantIran to be in position to use energy routes for political leverage or toaccrue additional revenues with which to augment strategic militaryprograms.

! Iranian leaders have complained that the United States seeks to keepIran militarily weak and, therefore, unable to defend itself in adangerous region. On WMD, Iran says it is abiding by the ChemicalWeapons Convention, and that it allows IAEA safeguards of nuclearfacilities.